DocketNumber: Docket No. 10909-78
Citation Numbers: 76 T.C. 191, 1981 U.S. Tax Ct. LEXIS 180
Judges: Featherston
Filed Date: 2/2/1981
Status: Precedential
Modified Date: 1/13/2023
*180
At the time of his death, decedent and his wife owned all of the stock in two corporations to which decedent was indebted in the amounts of $ 30,000 and $ 3,000. Pursuant to an order of the Probate Court, the last day for filing claims against the estate was Feb. 21, 1973. The corporations did not file claims against the estate for these debts. Nevertheless, in Aug. 1973, the estate filed a Federal estate tax return on which it reported the indebtedness to the corporations by claiming a $ 33,000 deduction. Wisconsin law (
*191 Respondent determined a deficiency in the amount of $ 14,428.37 in the Federal income tax of the Estate of Carl T. Miller for 1973. Respondent further determined that *192 petitioner Alice G. Miller is individually liable for the deficiency under section 3467 of the Revised Statutes of the United States as amended. The only issue for decision is whether the estate realized income during 1973 from*182 the discharge of indebtedness within the meaning of
FINDINGS OF FACT
The Estate of Carl T. Miller (hereinafter the estate) filed a Federal fiduciary income tax return (Form 1041) for 1973. At the time the petition herein was filed, petitioner Alice G. Miller (hereinafter petitioner) was a legal resident of Walworth, Wis. 2
Carl T. Miller (decedent) *183 died solvent and testate on November 4, 1972. Pursuant to decedent's will, his wife (petitioner) was appointed to be personal representative of his estate and trustee of the Carl T. Miller Trust created by the will. Probate of the will was conducted in the Walworth County Court, Probate Branch, and, during the proceedings, the court ordered that all claims against the decedent's estate be filed by February 21, 1973.
At the time of his death, and for a number of years prior thereto, decedent and petitioner each owned, individually, 50 percent of the outstanding shares of stock of the Waukesha Specialty Co. (Waukesha), a Wisconsin corporation. In addition, decedent and petitioner jointly owned all of the outstanding shares of stock of Walworth Foundries (Walworth), also a Wisconsin corporation. Decedent served as president of both corporations.
Sometime prior to 1959, decedent borrowed $ 15,000 from Waukesha. In 1963, he incurred a further obligation to Waukesha, also in the amount of $ 15,000. 3 These obligations, in the total amount of $ 30,000, were carried as assets (i.e., receivables) on the books of the corporation from the time they were incurred *193 by decedent *184 through the date of his death and for several years thereafter. Throughout the 1950's and 1960's, decedent and petitioner jointly maintained Waukesha's corporate books and records.
A number of Waukesha's unaudited financial statements, prepared during the period April 30, 1967, through April 30, 1973, show as an asset of the corporation a "Note Receivable -- Carl Miller" in the amount of $ 15,000. This figure represents the obligation incurred by decedent in 1963. The remaining $ 15,000 due from decedent is included in an amount designated in the financial statements as "Other Receivables." 4 The total amount shown as "Other Receivables," as of the various dates on which the financial statements were prepared, is as follows:
Apr. 30, 1967 | $ 30,200 |
Apr. 30, 1968 | 29,300 |
Apr. 30, 1969 | 29,300 |
Apr. 30, 1970 | 29,300 |
Apr. 30, 1971 | 22,500 |
Apr. 30, 1972 | 15,000 |
Oct. 31, 1972 | (See n. 4 supra) |
Nov. 30, 1972 | 15,000 |
Apr. 30, 1973 | 15,000 |
*185 It is not clear from the record to whom the obligation represented by the amount of "Other Receivables" in excess of the $ 15,000 owed by decedent was attributable; nor is it clear who made payments reducing the total to $ 15,000.
Both transactions giving rise to the decedent's obligations were conducted with the full knowledge of all officers and shareholders of Waukesha; however, despite the references described above to notes receivable, no written instrument setting forth terms for the payment of interest or principal was executed with respect to either obligation. Further, no payment of principal or interest has ever been made by decedent or his estate.
Subsequent to decedent's death, Waukesha did not attempt to recover the $ 30,000 that he owed to it by filing a claim against his estate. Steven Miller, decedent's son and a remainderman of *194 the Carl T. Miller*186 Trust, was president of Waukesha during the period set by the Probate Court for the filing of claims.
In 1953, decedent borrowed at least $ 3,000 from Walworth. No written instrument was executed setting forth terms for repayment of the amount borrowed, but the obligation was carried as an asset (i.e., a receivable) on the corporate books and financial statements. The unaudited financial statements of Walworth for 1967 through 1970, inclusive, show as an asset a "Note Receivable -- C. Miller" in the amount of $ 8,000. Five thousand dollars of this amount was paid to Walworth during 1971, reducing the "Note Receivable -- C. Miller" to $ 3,000, the amount that decedent owed to Walworth at the time of his death. Walworth did not file a claim against decedent's estate for the $ 3,000.
In August 1973, the estate filed a Federal estate tax return (Form 706) on which it claimed a $ 33,000 deduction for decedent's liabilities to Waukesha and Walworth. Schedule B of the Form 706 discloses a valuation of the Waukesha stock owned by decedent of $ 88.85 per share, computed as follows:
Waukesha net worth as of Oct. 31, 1972 | $ 201,384.84 |
Shares of stock outstanding | 1,700 |
Book value per share | |
(net worth / shares outstanding) | 118.46 |
Less 25-percent discount 1 | 29.61 |
Value of stock per share | |
for estate tax purposes | 88.85 |
On September 2, 1975, decedent's estate was closed and its assets were transferred in trust to petitioner. Subsequently, respondent determined that the estate, as a result of Waukesha's and Walworth's failure to file creditor's claims against it, realized $ 33,000 in income from the discharge of indebtedness during 1973. Separate notices of deficiency were mailed to the Carl T. Miller Trust (of which petitioner is trustee), as transferee *195 of the assets of the estate, and to petitioner, as fiduciary of the estate. 5
OPINION
Determination of the point in time at which a debtor's obligation has been canceled, giving rise to income, is essentially a question of fact. In making such a determination, State statutes limiting the time within which a creditor may bring an action against a debtor to recover the debt, while of evidentiary value, are not necessarily controlling.
Local statutes are not decisive of what constitutes income * * *. We are of course bound to follow established state rules of property, * * * but there is no property right in a statute of limitations which affects the remedy alone and not the obligation.
Respondent contends that decedent's estate realized taxable income in 1973 from the discharge of indebtedness to Waukesha and Walworth, in the total amount of $ 33,000, as a result of those corporations' failure to file claims against the estate in accordance with the provisions of
859.01 Limitation on filing claims against decedent's estates
(1) * * * all claims against a decedent's estate * * * are forever barred against the estate, the personal representative and the heirs and beneficiaries of the decedent unless filed with the court within the time for filing claims.
859.05 Time to file
Upon the filing of an application for administration the court shall by order fix the time within which claims against the decedent shall be presented or be forever barred. The time shall be*191 3 months from the date of the order.
Petitioner's position is that, in light of the particular facts of this case and notwithstanding the failure of the corporations to file claims as required by Wisconsin law, the obligations to Waukesha and Walworth have yet to be discharged. We agree with respondent.
Wisconsin's "nonclaim statute" (
We do not find petitioner's argument to be persuasive. As previously noted, the bar of Wisconsin's nonclaim statute may not be waived. 10*194 Moreover, petitioner's assertions to the contrary notwithstanding, there is no evidence that the indebtedness to Waukesha and Walworth would ever be repaid. In fact, even though decedent and his estate were solvent, no payments as of the date of the trial had been made to the corporations. Petitioner's suggestion that the "execution of new notes by the transferee trust with a definite repayment schedule should be sufficient evidence" of an intention to repay the corporations is not timely. 11
In support of her position that the debts have yet to be *198 discharged, petitioner asserts that the claims of the corporations were barred at the time of decedent's death by virtue of the running of Wisconsin's general 6-year statute of limitations. 12*195 In this connection, she cites
*196 Whatever the merits of petitioner's argument might be, 14 we *199 need not consider it. The fundamental premise of her position is that the corporations' claims were time-barred by the 6-year statute of limitations at the time of decedent's death, and this we find she has failed to establish.
*197 Depending on the terms for repayment of the several loans made to decedent, actions by the corporations to recover the amounts borrowed might have accrued and, therefore, the 6-year statute of limitations may have begun to run immediately upon the creation of each debt
Here, the stipulation states that no written instruments were executed setting forth terms for repayment of the money that decedent borrowed from Waukesha and Walworth, and the record contains no evidence regarding the substance of the terms for repayment (if any) contemplated in the loan agreements between decedent and the corporations. Accordingly, we are unable to determine whether and when the Wisconsin*200 statute of limitations began to run on the decedent's debts. Therefore, petitioner has not shown that
Relying on
First, we note that petitioner's analysis is not accurate, because the estate did not own 100 percent of the corporate stock. Second, while any reduction in the book value of the corporate stock may well have been relevant in determining the gross estate for estate tax purposes, it has no relevance whatsoever for purposes of determining whether the estate *201 realized taxable income from the cancellation of indebtedness. Regardless of the collateral effects on the value of the corporate stock, which may be taken into account in determining its basis for income tax purposes when the stock is sold, the fact remains that the cancellation relieved the estate from liability for the debts. 17
*201 Furthermore, petitioner's reliance on
Finally, petitioner argues that respondent did not properly raise the question of income being realized from the discharge of decedent's $ 3,000 indebtedness to Walworth. Apparently, this amount was initially placed in issue after petitioner had appealed a revenue agent's determination on another question *202 to respondent's district conference staff. In any event, the notice of deficiency was clearly sufficient to apprise petitioner of the respondent's position. Suffice it to say that, generally, "this Court will not look behind a deficiency notice to examine the evidence used or the propriety of respondent's motives or of the administrative policy or procedure involved in making his determinations."
To reflect the foregoing,
1. All section references are to the Internal Revenue Code of 1954, as in effect during the year in question, unless otherwise noted.↩
2. Petitioner served as personal representative of the estate and as trustee, as well as a beneficiary, of petitioner Carl T. Miller Trust, transferee of the estate's assets. It is agreed that, to the extent there is any deficiency in tax due from the estate, petitioner is liable as a fiduciary and transferee of the estate. See generally sec. 6901.↩
3. This obligation resulted from the purchase of a lakefront cottage from Waukesha. Out of a total purchase price of $ 22,500, decedent made a downpayment of $ 7,500, leaving an unpaid balance of $ 15,000. This amount was listed on the books of the corporation as a note receivable.↩
4. The Oct. 31, 1972, financial statement varies from this pattern and simply lists the entire $ 30,000 as "Accounts Receivable -- Carl Miller."↩
1. Decedent's shares were discounted 25 percent because Waukesha was closely held and paid no dividends.↩
5. See note 20
6.
(a) General Definition. -- Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: * * * * (12) Income from discharge of indebtedness;↩
7.
8.
9. Compare
10. But see
11. It does not appear that such notes have been executed.↩
12. See
893.14 Actions, time for filing
The following actions must be commenced within the periods respectively hereinafter prescribed after the cause of action has accrued * * *
893.19 Within 6 years; * * *
Within 6 years:
* * * *
(3) An action upon any * * * contract, obligation or liability, express or implied * * *↩
13. A long line of Wisconsin cases indicates that in Wisconsin, "unlike many states, the running of the statute of limitations extinguishes the [plaintiff's] right as well as the remedy" (
We do note, however, that a debtor may waive the bar of the Wisconsin 6-year statute. See
14. On brief, petitioner states that a personal representative of an estate may not waive
15. Petitioner complains that respondent's determination that the debts had been discharged by operation of law came too late for the corporations to amend their returns and claim bad debt deductions. She, therefore, characterizes respondent's position as "manifestly unjust," "sinister," and "scandalous." However, if the cancellation amounted to a constructive dividend, the corporations would not have been entitled to bad debt deductions. Of course, whether or not the cancellation resulted in dividend income has no impact on the case at bar. See
16. Compare
17. Had the corporations paid a cash dividend to the estate, the book value of the stock would have been reduced as a result of the decrease in corporate assets. This would not have made the dividend any less taxable to the estate, however.↩
L. B. Whitfield, Jr., and Virginia G. Whitfield v. ... , 311 F.2d 640 ( 1962 )
Rita G. Shephard, Guardian of Susan Shephard v. ... , 340 F.2d 27 ( 1965 )
Bear Manufacturing Company v. United States , 430 F.2d 152 ( 1970 )
Cohen v. Commissioner of Internal Revenue , 77 F.2d 184 ( 1935 )
North American Coal Corp. v. Commissioner of Int. Rev. , 97 F.2d 325 ( 1938 )
Securities Co. v. United States , 85 F. Supp. 532 ( 1948 )
Hartford Fire Insurance v. Osborn Plumbing & Heating, Inc. , 66 Wis. 2d 454 ( 1975 )
Pulchinski v. Strnad , 88 Wis. 2d 423 ( 1979 )
Johnson v. Heintz , 73 Wis. 2d 286 ( 1976 )
Schafer v. Wegner , 78 Wis. 2d 127 ( 1977 )
Marshall & Ilsley Bank v. United Bank of Madison , 68 Wis. 2d 101 ( 1975 )
Campbell v. Holt , 6 S. Ct. 209 ( 1885 )
Haase v. Sawicki , 20 Wis. 2d 308 ( 1963 )